Successful value investor tries activist strategy with an e-commerce health insurance play

eHealth provides private health insurance exchange services to individuals, families, and small businesses in the United States and China. Its e-commerce platforms organize and present health insurance information in various formats that enable individuals, families, and small businesses to research, analyze, compare, and purchase a range of health insurance plans. The company’s Medicare-related health insurance plans include medicare advantage, medicare supplement, and medicare part D prescription drug plans; and ancillary products, including dental, vision, and short and long term disability insurance plans. It markets health insurance plans through its websites, such as eHealth.com, eHealthInsurance.com, eHealthMedicare.com, Medicare.com, PlanPrescriber.com, and GoMedigap.com, as well as through a network of marketing partners. The company also licenses its health insurance ecommerce technology that enables health insurance carriers, agents, and brokers to market and distribute health insurance plans online; and provides online sponsorship and advertising services.

Stock Market Value: $1.67 billion ($64.25)

Percentage Ownership: 5.80%

Average Cost: $62.90

Activist Commentary:  Hudson Executive Capital (“HEC”) was launched in 2015 by Douglas Braunstein, formerly of JP Morgan, and Jim Woolery, formerly of Cadwalader, Wickersham & Taft, two activist defense advisors with no prior history of activist investing. Their thesis at the time was to use their network of CEO partners to source amicable engagements at $500 million to $15 billion companies. They firmly stated that their strategy was to work constructively with companies on operations and strategy to assist them in maximizing value for their shareholders and that Hudson will not run a proxy fight. Since then, Woolery has left the firm and they threatened a proxy fight and filed a lawsuit at USA Technologies Inc. (USAT), before entering into a settlement agreement with the company, indicating that their ideological “activist model” is broken. Hudson Executive has had impressive 13D returns – 91.60% versus 24.87% for the S&P 500 over the same period. However, they have only taken board seats twice before, one of which is still live and the other which was their worst performing 13D campaign. They certainly have done well as value investors, but there is no evidence that they have added value as activist investors or directors.

On March 10, 2021, Hudson and the company entered into a cooperation agreement, pursuant to which John Hass, former CEO of Rosetta Stone, was appointed to the board as a class I director with a term expiring at the 2022 annual meeting and as a member of the strategy committee of the Board. The company also agreed to engage in a process to mutually agree upon a second director in the next 45 days. Hudson agreed to abide by customary voting and standstill provisions.

Hudson filed a 13D on February 19, 2021 and in the last week filed an amendment reporting that they settled with the company for two board seats – one seat for John Hass, the former CEO of Rosetta Stone, and another seat that will be chosen by Hudson and the company. This is Hudson’s first board settlement where they did not get a seat for an Hudson executive, which indicates a potential lack of commitment and long-term focus. Despite this, they still signed a standstill agreement. Moreover, they clearly would have preferred to have better access to the board as the standstill agreement explicitly states: “For the avoidance of doubt, the Parties acknowledge and agree that Hudson intends to continue to engage in non-public discussions with members of management of the Company and the Board . . .”

Another part of the agreement that is worth noting is the reimbursement of expenses. While reimbursement of expenses is standard in activist settlement agreements, Hudson has a questionable past with such reimbursements. On April 26, 2020, Hudson settled its proxy fight with USA Technologies (USAT) for a majority of the board. On June 29, 2020, the new USAT Board of Directors unanimously approved the issuance of $4.5 million of restricted stock to Hudson Executive for the reimbursement of third-party costs and expenses incurred by Hudson Executive in connection with its proxy solicitation. In our opinion this was unusual and egregious for two main reasons: (i) the entire market capitalization of the company was only $354 million, and (ii) just three weeks prior to the settlement Hudson estimated in an SEC filing that their total expenses were about $1 million.

In this situation, the settlement agreement states that Hudson will be reimbursed for its “reasonable, documented out-of-pocket fees and expenses” but does not give an estimate of what those expenses are like we see in other settlement agreements. They do not disclose this despite the fact that they know what that number is, as the agreement specifically states that the expense reimbursement shall not “exceed the aggregate amount previously agreed to by the Parties”. Activist directors generally urge the company to err on the side of over-transparency and disclosure. Hudson does not appear to share this philosophy, at least with respect to the reimbursement of their expenses.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.